[Music] Thank you. Hello, everyone. It's Friday, and you're watching Within the Frame. I'm Kim Bo-young. South Korea's economy is facing growing uncertainty. Experts fell for an eighth consecutive month in May due to weak demand for a key item: semiconductors. Though some are saying China's reopening will give a boost to recovery, this has so far been proven to have had a limited effect. With a U.S.-China chipboard raging, it has become much harder for semiconductor manufacturers to find room to maneuver. What strategy does the chip sector need, and could this lessen the pressure on companies in the second half of the year? For an in-depth analysis, we have invited Professor Kim Se-won from Ewha Women's University. Professor Kim, welcome. Thank you for having me today. And we also have Professor Wagen Kim of the Mays Business School, Texas A&M University. Professor Kim, good to see you. Now, as both of our experts happen to have the same last name, for your convenience, I plan to call Mays Professor by his first name, Hagen.

you for your understanding. Right, no problem. All right, first question to our professor Kim. Now, the manufacturing sector's inventory level has reached 130.4 percent, the highest since data was first compiled in 1985, and the rise was led mostly by a drop in chip experts. Now, how serious is this economic situation given these figures? Uh, by definition, inventory means not sold products, so rising inventory is generally understood as a signal of coming economic downturn. Korean manufacturers' inventory-to-sales ratio in April reached its highest point since 1985. That means that the size of inventory compared to the sales is even larger than those of 1997 Nation financial crisis and 2008 Global financial crisis. In particular, the inventory-to-sales ratio of semiconductor and petroleum sector rose sharply, indicating that they are the biggest victims of the global demand slump and economic downturn. Uh, in April, uh, semiconductor inventory increased by 32% on month, and Petro inventory also increased by 15% on month. Uh, another gloomy signal of economic downturn is that the retail sales, engaged private spending, decreased 2.3

percent on month in April amid higher inflation and borrowing costs right. I see so it is a signal of economic downturn now. Professor Kim I'd like to ask you about how drop-in chip exports could impact the GDP now. According to the kdi the GDP Falls by when the GDP Falls by 0.78 percent uh the chip exports uh that is no the GDP Falls by 0.78 percent when the chip exports Fall by 10 percent now uh how dependent is South Korean economy on chip exports and how is the slow chip export recovery affecting someone's economy right now. Uh slowing team export gives a huge impact on Korean economy because chip is the number one export item to Korean economy which covers about 20 percent of total export uh as chip export declines quickly these days uh Korean economy as a whole uh also further declines uh this year a cheap export declined about 40 compared to last year so assuming that kdis estimation on the numerical relation between chip export and economic growth is correct a declining chip export drags down Korean

economic growth by three percent this year, and slowing chip industry is the main factor that bank of Korea and kdi all slash this year's economic growth forecast recently. Bank of Korea cut Korean economic growth forecast down to 1.4 percent from a previous 1.6 percent, and the kdi, which is the largest Korean government Think Tank, also cut the growth rate forecast from 1.8 to 1.5 percent. Both institutions believe that economic growth for this year further adjust the downside if Global cheap Market does not uh rebound by the end of this year right. I've seen now Joaquin China's reopening was expected to give a boost to the South Korean economy because it is largely expert-driven, and China is a major trading partner for South Korea. However, the effects remain quite limited. Why is this, and as the Korean International Trade Association said, well, China's reopening gradually lead to Recovery in the Korean chip industry in the second half of this year. Well, there well, there are reasons probably so one of the reasons would be.

China's reopening so far has spurred the growth of consumption in the service sector. I think this is understandable because major parts of the service sector consumptions will be held in outdoor settings, and naturally, this is going to increase the outdoor activities in nearby era within China. So it's more like a domestic consumption. According to some study by the Bank of Korea, the Chinese economic growth can increase definitely the Korea's economic growth more in case of the manufacturing consumption goods but much less for the service consumption goods. So one related thing is the Chinese tourist so far hasn't come back to Korea that much, and also the Chinese government has not yet completely allowed the group tours to Korea. So that's one of the reasons. And then finally, as Professor Kim pointed out, the inventory level of the chips and these major products actually is pretty high not just in Korea but also in China. Therefore, it's going to take some time for them to digest their own inventory until we see some strong demand coming back, right? I see, we'll have to wait and see.

Professor Kim, what's aggravating the difficulties faced by gym makers is, of course, the power struggle between China and the US. How is this issue developing the policy target of US on global gym market is very clear? They want to construct their own cheap industry system with Japan, Korea, and Taiwan, and of course, without China. The future of Korean cheap industry will be determined by how queer manages the situation over the serious conflicts between us and China on chip production. Recently, Beijing banned US manufacturer Micron's sales in China, and it would be a chance for Korean chip producers like Samsung Electronics and SK High next to increase market share in China. But actually, I think it is a very well-designed strategy of Beijing to dismantle chip the cheap production alive by providing benefit or larger market to Korea. So, Korean chip producers are not likely to expand their sales in China by substituting Micron's chip supplies. Go ahead, that's exactly why South Korea is taking a very cautious stance between

the U.S. and China as seen much clearly in statements released after the Apec train ministers recent meeting. Actually, the Chinese Commerce Ministries claimed that ministers agree to enhance talks and cooperation in the chip sector, but the Korean trade Ministry said they only talked about the necessity of such cooperation. Could you briefly tell us more about what the levels Hall is facing right now, Professor Kim? Uh, as we talked about, this is an important time for the future of Korean chip industry over the conflicts between us and China. Uh, uh, Korean government takes, uh, uh, very cautious steps over demands from Washington and Beijing. U.S. dominates actually chip production technology including patterns, but China covers almost 60 percent of Korean chip export. Beijing understands that chip is the one of the most important products for the development of Chinese economy to the higher technology-based economy, so Beijing can't quite give up chip impulse from Korea. Given these circumstances, Beijing released an agreement that highlights a further cooperation on chip protection between Korea and China after APAC building last.

week, but Korean Department of Commerce kind of devalued the meeting with uh, with Chinese counterpart without any uh, without any official agreement, right? I see the point now, uh, vacuum. Meanwhile, the iPad's four team members reached a deal regarding supply chain resilience. Now, what are the details and how is this going to uh, worsen Seoul's dilemma? Well, this ITF, which is Indo-Pacific Economic Framework for Prosperity, includes 14 countries, including Korea, Japan, and U.S., and some other Indo-specific countries. So, in a nutshell, the basic idea of this thing is to share the risks related to trade and supply chain. There are some other things, other pillars such as like clean economy or the things, but the major item, I believe, is supply chain risks, as we saw from like these U.S. automakers chip shortage problems and also we had some issues with the urea waters. So, these kind of things can be resolved a bit if we, these countries who have either materials or technologies reproduction processes can share the risks related to

these and they have some very specific items like resiliency efficiency productivity etc. But as I just said, it's going to be about how to coordinate with each other in case there are major trading partners cannot provide enough products for the materials. And can we share the risk? So, in that sense, this is a nice setting or the policy tool so that they can reduce this type of risk. And also, it's not as much emphasized but I think if you look at the U.S. side of the treasury of the announcement, they also focus a lot on the trade pillar of this IPEF port, which also clearly related to this China-U.S. tension and trade war type things as well, right? I see now Professor and Kim Washington and Tokyo are especially strengthening ties in semiconductors recently, both vowing to deep incorporation in the research and development of advanced chips. Then some are expressing concerns for sound crunchy makers this whole could be left behind. Should we really be worried about this? Uh, I think so.

uh, if we take a look at the history of the global gym market, uh, Japan used to be the most competitive cheap producing country until the 1990s. But all Japanese chip manufacturers disappeared in the middle of the chicken game with Korean chip producers in the 1990s and 2000s. And it should be also noted that Japan is still very competitive in cheap producing materials and parks. So, as U.S. and Japan deepened cooperation in the research and development of advanced chips and other technologies, there comes a high possibility that Japanese corporations would recover chip production competitiveness against Korean producers. Actually, that's what Kishita, Japan government's hopes for in the future. That means that the only way to maintain the top competitiveness in chip production, Korea should more extend research and local production in U.S. and Japan. It also means that Korea should be more participating in the quad quadrangle chip alliance among U.S., Japan, Taiwan, and Korea. Right, quite concerning aspect for South Koreans makers. Indeed, now, Professor Kim, I'd like to ask you one more.

question. Since the successful launch of OpenAI's check GPT, recently, Nvidia's value has kept ballooning to the point where it has gone to one trillion US dollar company, right? And watchers are expecting this AI boom will bring about recovery in the chip sector and be helpful for South Korean shoemakers. Is this what we can really lean on? Uh, that's correct. Uh, actually, global chip demand is largely affected by global events like World Cup and COVID pandemic, and also technological advances like video streaming and smartphones hugely affect global chip demand. So, the recent popularity of Chad GP chat GPT, which is AI-based searching engine, and Nvidia, which fastens the speed of AI-based operations, provide another big wave of memory chips. Technically speaking, Nvidia's graphic chips and Korean memory chips are complementary to each other like coffee and sugar. As the demands for Nvidia's graphic chip increase, the demands for Korean memory chip also increases. So, as more AI-based products are introduced, there will be more demands.

for Korean memory chips, uh, it could bring cheap Market recovery and Korean economics recovery earlier than expected, right? That's quite reassuring to hear. Now, walking in, shifting gears a little bit to the Fed's rig study meeting in June. Now, Stocks did rally thanks to the end of the debt selling Saga. However, concerns linger in the market as a fast rate decision is soon coming up. Now, some Fed officials are signaling signaling to keep interest rates steady. What would be the reasons behind this? So, um, I just looked at the uh, the FED watch, which is the CME group's kind of indicator. So, what's the probability of the rate going up versus not? And a few about a week ago, in fact, the rate increasing by 25 basis one has higher probability around 65 to 70 percent. Now, I think it's flipped, probably in part because of some of this announcement by Fed officials. And uh, one of the reasons is when we see typically the interest rate entry increases. Target rate increases, there are a couple of things. One is definitely inflation or

expected inflation. So, if expected inflation is higher than a certain, you know, threshold, then, um, typically, the FED tries to preemptively move by increasing the interest rates. But at the same time, they also look at the real economic activities, such as the GDP growth. Like the output gap measure is the difference between actual output versus the potential output. If this is also very high, then this also adds to the possibility of increasing the interest rate. They also look at unemployment rate data. So, if the economy seems to be overly inflated because of this, you know, the very active labor market, and they also are likely to increase the interest rate. So, there are multiple things in and here, at least in terms of inflation, still higher than what they want to, but in terms of the real economic data, such as the output growth or the unemployment part, seems to be lagging and continues to be, uh, lagging. So, clearly, there are some chances that they want to stay a little longer to see how the recession type of the possibility is going to be around. So, they tried to wait.

for the June and in July, when more data come, then I think they'll probably make more distinctive decisions. So, if you look at the FED watch for the July one, it's still 40-40-20 or 50-50, so they don't know. But at least for the next, the very next one, which is the June one now, I think it's about 70 percent chance of staying put and then about 30 percent and I'm just increasing, so still the uncertainty exists but more likely to be staying good, right? I see multiple factors to consider, no hugging. Even If the Fed forego that decision this time, it is widely expected as because of your what you have said earlier, this U.S. Central Bank will retain the option to make further hikes in the coming months, right? And uh, this is because like you said, the U.S. inflation rate is still far above the fed's target of two percent. How do you expect it to be more specifically, and if it does make that kind of decision, how

is this going to affect South Korean economy that is already struggling sort of like late um 17s when they actually start seeing the uh interested interest rate increasing and inflation increasing they tried to be preemptively moved and they thought the inflation was going down but then this horribly failed and the interest rate actually went back the inflation back a bit again and then volatility was very high so this bad traumatic experience probably gives some lingering sort of thoughts to Fed officials that they really have to move uh preemptively so that this type of thing is not repeated so that's one of the reasons that the FED still is not giving up and they think that there's a chance that inflation can just increase back and then they want to definitely just remove this type of possibility so they keep just looking at the data at the same time as you may know some of the bank failures happened and this is somewhat uh less expected from the feds point you because when they initially increased interest rates obviously they think that

the banking sector is going to benefit from this because usually higher interest rate is going to be more profitable environment for the banks. Because they can charge higher interest rate to their loans as you know the other the products. However, somehow it's still a research project for many people but the banks purchase treasuries and corporate bonds. And when typically interest rate going up, these bond prices will go down. Therefore, their value of assets go down and this triggered a lot of the banking issues recently. And then some banks in fact failed and filed for bankruptcy. So the FED now worries about like their Bank instability because this has very big contagion effect and the key to success of the monetary policy depends a lot on the stability of the banking sector. So if the banking sector is kind of struggling there's no point. So they also try to carefully look at this part as well. So that's actually why there's a chance that they will increase the interest rate looking at how the banking sector responds. But that's one.

of the things coming back to your question about the Korean economy. Clearly, when the interest rate goes up from the U.S. side, then the exchange rate is going to be one of the major impacts for the uh the Korean economy. Typically, when exchange rate is going up against the dollar, that should have some positive impacts on exports, so it should be a good thing. But so far we didn't see this much of the effects because usually there's a J-curve effects. Again, the debate great effects happen, and so there are other factors nowadays because of the political risk, etc. So overall, eventually it's going to have some positive effect, but if the U.S. economy is slowing down in recession, this leads to Global recessions, and that's going to be bad news to Korea. So it's still somewhat uncertain, but we have to keep looking at this, and also the Bank of Korea probably has to move accordingly because if you just keep just lowering the interest rate or a distinct interest rate at this level, there's a chance that there will be some issues because of the

big interest gap between the two countries right. I see. Well, thank you, Hugging, for your easy explanation for us to better understand this difficult fed decisions and the impact on South Korean economy. Now, uh, thank you. Now, unfortunately, this is all the time we have for today's edition, but thank you, Professor Kim Sewan, and Professor Huang Kim for your insights. We really appreciate it. Thank you very much. Pleasure. Thank you. All right, that's all for within the frame tonight. We'll be next Monday with more in-depth stories. Thank you for watching. Enjoy the weekend and goodbye. [Music] Foreign

Manufacturing industry's inventory-to-shipment ratio hits 130.4% led by drop in chip exports

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